Nigeria wants to start charging a tax on local online purchases

As part of plans to raise more revenue to fund a record budget, Nigeria’s government is considering a 5% Value Added Tax (VAT) specifically for online purchases. Babatunde Fowler, head of Nigeria’s federal tax agency, says the government may appoint banks as agents to deduct 5% VAT on all local online purchases with a bank card. The policy could be in place by early next year, Fowler said in an interview with Premium Times, a local online newspaper.

The move comes amid speculation the agency is looking to increase current VAT rates to boost government revenue. But Fowler says the preferred choice will be expanding the country’s tax base rather than increasing existing VAT. As part of efforts to grow the tax base, Nigeria launched a tax amnesty program in 2017 encouraging tax evaders and defaulters to pay up without facing penalties. Midway through the amnesty period, the agency claimed it collected nearly $47 million from tax evaders.

The online purchase tax proposal appears at odds with Nigeria’s long-held ambitions for a cashless economy given the possible effect of disincentivizing online purchases. If launched, it also adds to a growing number of existing charges Nigerian bank card holders already face, including a card maintenance fee.

There’s another potential effect: Nigeria’s fledgling startups and businesses, possibly the biggest success story in the country in the last decade, may be caught in the crosshairs of the policy.

At their core, some tech companies in Nigeria have attempted to engineer a broad change in local social behavior by getting more Nigerians to adopt online purchases and payments. And, so far, that goal has already faced stumbling blocks in general skepticism around online payments given fears of fraud and early-day struggles with failed transactions.

“This will lead to a decline in use of cards online,” says Oluyomi Ojo, founder of Printivo, an online design and printing company. “Merchants will opt for bank transfers and customers will opt for other options. There’s no other way to look at the proposed policy than to see it as a card payment killer.,” he adds.

Crucially, the policy proposal also comes as more online businesses begin to scale back on cash payment on delivery options, nudging more customers to embrace online payments. E-commerce companies like Jumia and Konga have also invested in in-house payment solutions to ease online payments for shopping on their platforms.

There’s one silver lining for online businesses though. In Nigerian government circles, announcements of policy considerations are often more bluster than purposeful thinking. For instance, a 9% communications tax for phone calls, texts internet data and cable television proposed back in 2016 never even took off.